Among the several quirks of Dr Sheldon Cooper from the TV series The Big Bang Theory was the infamous room-mate agreement. And even though the agreement was more than 100 pages long and was hilariously elaborate, there were loopholes pertaining to the lack of clarity about certain terms. For instance, the term ‘emergency’ was not defined, an error that often led to conflicts between Sheldon and his roommate Leonard Hofstadter, resulting in a truckload of laughter.

In real life, however, undefined clauses or terms in an agreement are rarely funny. In business contracts, an existence of clearly written agreement is crucial to fulfillment of obligations. That takes us to the importance of service level agreements.

What is an Service Level Agreement (SLA)?

When a service provider or a vendor offers his/her services to a company, both the parties create an agreement called Service Level Agreement or SLA. This agreement lists the services that the vendor will provide, the timelines within which those services will be provided and the compensation for the same. There are several other terms and conditions listed in this agreement according to the type of contract, industry or domain.

But most importantly, an SLA is a contract that details the ‘how’. For example, an IT company providing an office management software solution to a business will list all the features of the solution, how the solution will be integrated into the company’s existing system, the expected timeline for installation and execution of the software, the availability of support helpline, the learning curve of the in-house employees and the expected percentage of productivity or difference that the software will create for the benefit of the said business.

Ebook: Transforming Contract Lifecycle Management with Artificial Intelligence

What is an SLA all about?

1. Overview of the agreement

An SLA summarizes the agreement between the service provider and the service receiver. This means, it details the nature of service, the expected quality of service, the timelines of delivery,  the expected outcome of the service, and the compensation.

2. Goals of both the parties

While the receiver wants to get some kind of work done, the provider earns money from the services given. The purpose of both the parties is clearly written in an SLA.

3. Needs or requirements

SLAs ideally include the needs of both the parties in the process of fulfilling the said services. Often vendor-business contracts are mutually collaborative, and both the parties need to fulfill certain obligations. Such needs are clearly spelled out for future clarity.

4. Measurement of services

Standards of quality are defined in the contract that may bind the vendor to perform as per those standards. This serves as a guide for the vendor for quality control and delivery of products or services.

5. Communication channels and reporting

Another crucial aspect of an SLA is the listing of communication channels and reporting procedures. In performing certain services, somebody needs to supervise and check if the process is on track. Such points of contact as well as reporting formats are defined.

6. Plan-B

An under-rated yet vital aspect of a thoroughly drafted service level agreement is Plan-B i.e the plan when things don’t go as per the original plan. This is often the compensation plan for the time or resources lost.

7. Conditions of cancellation

Under what circumstances can this agreement be terminated? What conditions may lead to automatic cancellation? What happens in the event of cancellation? Such terms are listed under these.

Read Also: How Poor Contract Management will Cost you, Now or Later

Types of SLAs

Broadly, there are three kinds of SLAs –

• Customer SLA
• Internal SLA
• Multilevel SLA

1. Customer SLA

A service level agreement between a customer and a vendor or a service provider is a customer SLA. For instance, the SLA between an internet provider and their individual customer.

2. Internal SLA

There are SLAs within a company that help two divisions or departments to work together. The most common example of an internal SLA is between the sales team and the marketing team.

3. Multi-level SLA

When there is an SLA between more than two parties, meaning when there is more than one vendor and more than one customer, the SLA becomes multi-level. For instance, a company may have an SLA between its internal Sales and Marketing teams and an outsourced vendor for Customer Acquisition where all the three teams will deliver services to the company’s end customers.

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Why are SLAs so important?

1. Protection of interests

An SLA is usually an elaborately written contract that lists the interests and expectations of both the parties along with their obligations with each other. As a result, an SLA really protects the interest of both the parties as it serves as a legally binding document for both. If any one of the parties fails to fulfill their share of obligations, the other party becomes eligible for compensation.

2. Helps in case of failure of obligation

An SLA serves as evidence that certain expectations were set for both the parties along with the compensation details in case of failure. If a vendor fails to deliver within the specified time in SLA, he or she is obligated to either cut the cost of the overall service or provide extra services in compensation.

3. Accountability

Since reporting channels are written in an SLA, the document serves as an efficient way of holding both the parties accountable. This also aids in keeping the work or task on track along with opening up clear communication platforms while bringing transparency into the system.

4. Better efficiency

When both the parties are aware of their obligations and there’s accountability, businesses are able to achieve better efficiency in the day-to-day operations. Each SLA for the services being provided or received serves as a yardstick of quality parameters resulting in streamlining the process of delivery.

Is it possible to create efficient SLAs?

Yes and No. No matter how good a system is, there may always be a gap or a loophole. The same is true of legal contracts or documents. This is why the first step towards creating an efficient SLA would be to automate the process, and bring all your SLAs on one platform for better tracking and access. AI-based CLM platforms such as Revnue aid in creating efficient SLAs and take all the stress out of the equation.